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By Michael O. Leavitt and Thomas Barker -
The Washington Times -
Friday, February 25, 2011

ANALYSIS/OPINION:

Years ago, Washington was rocked by revelations that no-bid contracts were causing the government to pay outrageous prices for routine purchases. One famous example was the $600 toilet seat that inspired then-Sen. William Cohen to quip, “It gives new meaning to the word throne.”

There’s similar wastefulness in the Medicare program, and it’s tied to a similar no-bid philosophy in medical equipment and supplies. Unfortunately, a full-court press is under way to persuade the U.S. House and Senate to repeal competitive bidding. A better policy would be to fix the flaws but continue to allow competitive forces to create value for Medicare beneficiaries and the taxpayer.

Here’s the history: In 2003, Congress wisely directed Medicare to implement competitive bidding, starting gradually by focusing on 10 items in 10 health care markets across the United States. Once the concept had demonstrated its value, it was to be expanded to more products and more markets.

The initial bids demonstrated on average 29 percent savings. That translated into a projected savings of $1.4 billion for the Medicare program by 2012 and $340 million in savings for program beneficiaries. Because of these impressive savings, the Department of Health and Human Services (HHS) moved to implement the program as Congress had directed.

As one would expect, requiring vendors to bid competitively where they had not before created significant anxiety among those who made and sold the products involved. Their trade associations and advocacy groups mounted a rigorous lobbying effort, arguing that the plan had flawed ideology and methodology. They succeeded. Contracts had been awarded, and the plan was three weeks into implementation when Congress ordered it delayed for 18 months.

In the more than seven years since competitive bidding was passed by Congress, the U.S. budget deficit has increased from $377 billion to $1.6 trillion. Our national debt has grown from $6.7 trillion to $13.8 trillion, and health care as a percentage of the gross national product has grown from 15.9 percent to 17.5 percent.

During the 18-month delay, a new administration was elected. The Obama administration laudably moved forward with competitive bidding. It made some revisions and rebid Phase 1 of the pilot using the same 10 products, this time in nine markets. The program went into effect on Jan. 1.

In June, Phase 2 of competitive bidding will begin. It will include more products and more markets. Once again, resistance is building among those who prefer to avoid competitive bidding.

Except in special circumstances, competitive bidding is an undisputed base line of fiduciary duty for any steward of public funds. Delay would confirm the worries of those who doubt Congress has the political will to make the serious changes necessary to transform health care spending.

Phase 1 of the durable medical equipment competitive bidding process was not flawless. It can be and must be improved. That’s why it was a pilot program. Pilots are used learn from and to minimize the inevitable mistakes. Phase 1 has revealed three problems with obvious fixes:

First, the bidding process lacked sufficient rigor in qualifying bidders. Some bidders lacked the financial capability to deliver on their bids; they offered prices so artificially low they could not deliver the products. As a result, experienced vendors were eliminated, leaving the Medicare program with a few low-ball bidders who might not be able to deliver equipment to Medicare beneficiaries. Every government bid deals with this problem, and it can be fixed by adopting common procurement rules used in other government programs.

Our second recommendation is that all ways of distributing the same product should be treated similarly. For example, treating diabetic test strips sold in retail settings differently from those distributed through mail order not only defies fairness, it clearly produces outcomes perverse to the taxpayer and patient. In a phenomenon that has been widely written about, the four largest providers of mail-order supplies are no longer providing products. As a result, services to Medicare beneficiaries cost more, not less. Both retail and mail order should be bid.

Finally, future bids can be more sensitive to quality and value rather than just price. This will require the development of transparent quality standards and methods of measurement. Categories of competition should be developed that combine the basic product and services that might accompany it. We should be rewarding value, not just cheap unit price.

As we move toward Phase 2 of competitive bidding, pressure will come to once again delay or cancel bidding. Despite the imperfections of Phase 1, we must learn from the experience and continue.

Michael O. Leavitt was the secretary of the U.S. Department of Health and Human Services (HHS) from 2005 to 2009. Thomas Barker is a partner with Foley Hoag, former acting general counsel for HHS and general counsel to the Centers for Medicare and Medicaid Services.